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10 The Government’s Case

Howard H. Lewis Indiana University Press ePub

10

The Government’s Case

The government’s case came in two parts. The first, developed to considerable extent in the Final System Plan, was an argument that the country could, if necessary, do without railroads in the Northeast altogether. We thought this contention patently absurd. Indeed, during his examination, one of the government’s key witnesses, Edson L. Tennyson of the Pennsylvania Department of Transportation, blurted out in exasperation, “Who’s kidding whom? You simply can’t move ore, coal, or grain in the Northeast by land except by rail.” We then set about disproving the government’s assertion by specific examples.

The second prong of the government’s attack was to concede, arguendo, that rail service was indispensable, but to insist that the bankrupt railroads were such hopeless losers that the public, state and local governments and authorities, and the profitable western roads would pay next to nothing for the properties, certainly no more or just a little more than they were worth in liquidation for nonrail use. Their value then would be what the government contended in the Final System Plan. The fundamental thrust of our argument that the government brought the disaster on the railroads was aimed at countering this contention. According to us, if only the government ceased its interference through both regulation and cross-subsidy, the railroads would return to profitability.

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7 Detailed Case Preparation

Howard H. Lewis Indiana University Press ePub

7

Detailed Case Preparation

What, then, was the task that now consumed my life—what were the flesh and bone of the argument that I had to make? On the one hand, there was the government’s scrap case, with all its discounts and unfavorable adjustments, which led them to offer the sum of $32 million for the entire Reading system, including all the leased lines such as the North Penn. On the other was our argument for value as an operating railroad with respect to the Class A and B properties and as scrap for the Class C properties. I really did not have much hope for the OCLDD valuation of $230 million, as the court had made it fairly plain that this would only serve as a backup in the event that there was no other way to “fairly” value the properties. There existed limited attacks on the government’s scrap value, as described earlier, but this wasn’t going to get us very far. Therefore, it was necessary to stress the continued valuation argument with respect to the Class A and B properties.

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1 The Age of Innocence

Howard H. Lewis Indiana University Press ePub

1

The Age of Innocence

My first experience with the Reading was learning in 1971 that we at ORM&H would be counsel for it in its recently filed reorganization, and wasn’t that exciting? It didn’t really excite me. From what I casually learned about the case, it seemed to be a litigation, not a corporate matter, and I expected to have little if anything to do with it.

In the winter of 1972–1973, my mentor, Herbert A. Fogel, who was in charge of the Reading account, decided to ascend to the federal bench, and shortly thereafter my managing partner, William Fuchs, asked me to look into the representation to make sure that our client was being serviced adequately. I dutifully reported that I sensed some unhappiness in my short meetings with Reading’s staff and Drew Lewis, its active trustee, and that their affairs could stand some more hands-on legal representation. He turned to me and said, “OK, you’re it.”

“But Bill,” I replied, “I hate trains.”

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2 The Gathering Storm

Howard H. Lewis Indiana University Press ePub

2

The Gathering Storm

After the passage of the Rail Act in January of 1973, I decided it might be a good idea to read it. The act introduced an entirely new concept into American bankruptcy law: the idea of dual reorganization. Under it, the rail operations of the several railroads in bankruptcy in the region, defined as the northeast quadrant of the United States—namely, the Penn Central (much larger than the rest of the roads combined), the Reading, the Lehigh Valley, and the Central Railroad of New Jersey (all roughly the same size), the Ann Arbor and the Lehigh and Hudson River (much smaller), and later the Erie Lackawanna (smaller than Penn Central but much larger than Reading)—were to be split off from the remaining properties of the bankrupts and formed into a new government-controlled railroad called Conrail. The remaining properties were to continue in reorganization under Section 77, from which the creditors and possibly the stockholders would receive relief in the form of stock, cash, or new debt in many possible forms. The bankrupts would also be given interests in the new railroad in compensation and substitution for their transferred rail properties.

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8 The Times That Try Men’s Souls

Howard H. Lewis Indiana University Press ePub

8

The Times That Try Men’s Souls

The meetings we had of counsel for all the transferors, where we sat around trying to feel each other out, did not occur in a vacuum. Prior to our getting together, the Special Court had made a strong suggestion as to what it did and did not wish to hear, and we had already had the two rounds of briefing and oral argument described above, one on the constitutional minimum value and the other on the unconstitutional erosion. It was clear at this point that if the public remained the buyer, the price it would have paid was limited; perhaps, as the court suggested, it might have paid original cost less depreciation and deterioration (OCLDD), but reconstruction new was out of the question. At any rate, our first line of attack had to be to value the operating properties as an operating profit-making enterprise, not as a public service, or, if valued as a public service, as a key ingredient in an overall rail transportation network. The net result of this conclusion led all but one of us to make up a hypothetical universe in which there were a number of buyers competing for our properties, and, with respect to a public buyer, a number of competitors to provide the service offered by the railroads.

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